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New York Offers Costly Lessons on Insurance

When her small executive search firm in New York City canceled its health insurance policy last year because of the recession and rising premiums, April Welles was able to buy her own plan and still be covered for her cancer and multiple sclerosis.

She was lucky to live in New York, one of the first states to require insurance companies to offer comprehensive coverage to all people regardless of pre-existing conditions. But Ms. Welles, 58, also pays dearly: Her premium is $17,876 a year.

“That’s a lot of groceries,” she said.

New York’s insurance system has been a working laboratory for the core provision of the new federal health care law — insurance even for those who are already sick and facing huge medical bills — and an expensive lesson in unplanned consequences. Premiums for individual and small group policies have risen so high that state officials and patients’ advocates say that New York’s extensive insurance safety net for people like Ms. Welles is falling apart.

The problem stems in part from the state’s high medical costs and in part from its stringent requirements for insurance companies in the individual and small group market. In 1993, motivated by stories of suffering AIDS patients, the state became one of the first to require insurers to extend individual or small group coverage to anyone with pre-existing illnesses.

New York also became one of the few states that require insurers within each region of the state to charge the same rates for the same benefits, regardless of whether people are old or young, male or female, smokers or nonsmokers, high risk or low risk.

Healthy people, in effect, began to subsidize people who needed more health care. The healthier customers soon discovered that the high premiums were not worth it and dropped out of the plans. The pool of insured people shrank to the point where many of them had high health care needs. Without healthier people to spread the risk, their premiums skyrocketed, a phenomenon known in the trade as the “adverse selection death spiral.”

“You have a mandate that’s accessible in theory, but not in practice, because it’s too expensive,” said Mark P. Scherzer, a consumer lawyer and counsel to New Yorkers for Accessible Health Coverage, an advocacy group. “What you get left clinging to the life raft is the population that tends to have pretty high health needs.”

Since 2001, the number of people who bought comprehensive individual policies through HMOs in New York has plummeted to about 31,000 from about 128,000, according to the State Insurance Department.

At the same time, New York has the highest average annual premiums for individual policies: $6,630 for single people and $13,296 for families in mid-2009, more than double the nationwide average, according to America’s Health Insurance Plans, an industry group.

Rates did not rise as high in small group plans, for businesses with up to 50 workers, because the companies had an incentive to provide insurance to keep employees happy, and so were able to keep healthier people in the plans, said Peter Newell, an analyst for the United Hospital Fund, a New York-based health care research organization.

While premiums for large group plans have risen, their risk pools tend to be large enough to avoid out-of-control rate hikes.

The new federal health care law tries to avoid the death spiral by requiring everyone to have insurance and penalizing those who do not, as well as offering subsidies to low-income customers. But analysts say that provision could prove meaningless if the government does not vigorously enforce the penalties, as insurance companies fear, or if too many people decide it is cheaper to pay the penalty and opt out.

Under the federal law, those who refuse coverage will have to pay an annual penalty of $695 per person, up to $2,085 per family, or 2.5 percent of their household income, whichever is greater. The penalty will be phased in from 2014 to 2016.

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“In this new marketplace that we envision, this requirement that everybody be covered, that should draw better, healthier people into the insurance pool, which should bring down rates,” said Mark Hall, a professor of law and public health at Wake Forest University. But he added, “You have to sort of take a leap of faith that that’s going to happen.”

As part of the political bargain to get insurance companies to support insurance for all regardless of risk, called community rating, New York State deregulated the market, allowing insurers to charge as much as they wanted within certain profit margins. The state can require companies to retroactively refund overcharges to consumers, but it seldom does.

Now, Gov. David A. Paterson has proposed to reinstate prior approval by the state of rate increases for the small group and individual plans, as a way to reverse New York’s death spiral of healthy people fleeing the market. The change would affect about 3 million of the 10 million New Yorkers insured through private plans, according to the Insurance Department. Most of those are in small group plans, though the biggest beneficiaries might be those seeking individual coverage, where premiums are highest.

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New York’s insurance companies are vigorously fighting prior approval. Mark L. Wagar, the president of Empire BlueCross BlueShield, said New York’s problem was not deregulation of rates, but the lack of an effective mandate for everyone to buy insurance. To illustrate, he offered a statistic on how many people in the 18-to-26 age group, who are largely healthy, have bought individual insurance coverage through his company: 88 people out of 6 million insured by his company statewide.

New York is “the bellwether,” Mr. Wagar said. “We have the federal health reform on steroids in terms of richness and strictness.”

The federal health care overhaul contains some protection for people who buy into the new insurance exchanges — organized marketplaces — created by the law. Beginning in 2014, states will be able to recommend that the Department of Health and Human Services ban companies from the exchanges if they impose rate increases the states consider unreasonable.

Mr. Wagar also said that New York’s medical costs, universally acknowledged as being among the highest in the country, were a factor in its high premiums. He noted that the state already regulated insurance company profit margins, allowing them to allocate no more than 25 cents of every dollar for profits and administration in small group plans and 20 cents for individual plans. The governor is proposing to lower both margins to 15 percent.

Troy Oechsner, deputy superintendent for health at the State Insurance Department, blamed the insurance companies for raising rates beyond what was necessary — by being off on their projections — thus accelerating the exodus of healthy people.

“What we saw them do is they really jacked up rates because they could,” Mr. Oechsner said.

To a large extent, insurance companies police themselves, according to Mr. Oechsner. From 2000 to 2007, insurance plans reported that they exceeded state profit allowances just 3 percent of the time, resulting in about $48 million in refunds to policyholders, Mr. Oechsner said. Yet subsequent Insurance Department investigations found that insurers should have refunded three times as much.

The governor’s budget projects that reinstating prior approval would help the state close its $9 billion deficit, saving taxpayers $70 million in the first year, and $150 million after that, by stemming the exodus of people from high-priced plans into state-subsidized plans.

An analysis of the governor’s plan released recently by the Business Council of New York State, whose membership includes insurance companies, contested the governor’s savings estimate, saying that it was “at best speculative,” and that the savings would probably be nominal.

Mr. Hall, the Wake Forest professor, said that with the risk spread over a bigger pool of insured people under federal changes, insurers would be expected to reduce their prices, especially in New York. But Mr. Hall said that insurers might hesitate to do that until they were sure people were going to buy coverage, which could lead to a sort of mutual paralysis.

“You can literally think of people standing around a swimming pool, saying let’s jump in at once,” he said.

As for Ms. Welles, she is not sure how much longer she can keep paying rising rates.

“This is not something that will be sustainable for the rest of my life,” she said. On the other hand, she added, “frankly, with the kind of cancer I have, I don’t think I’ll be paying this for too many years.”

A version of this article appears in print on April 18, 2010, on Page A1 of the New York edition with the headline: New York Offers Costly Lessons On Insurance. Order Reprints|Today's Paper|Subscribe